When’s right time to claim Social Security?
Study: Retirees lose by taking benefits at less optimal age
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It's tough to decide when to start taking Social Security benefits, and it appears many people are shorting themselves with their choice.
A new study finds just 4 percent of retirees start claiming their Social Security benefits at the most financially optimal time. And current retirees collectively will lose $3.4 trillion in potential income to fund their retirement because they started drawing benefits at a less than ideal time. That's roughly $111,000 per household, according to the research from United Income, an online investment management and financial planning firm.
Americans typically can start claiming their Social Security benefits as early as age 62 and most adults do so by the time they turn 63. But the size of the monthly benefit grows for each year they wait, maxing out at age 70.
Dave Gilger of Warren is a retired Warren firefighter who golfs in a league at Tamer Win in Bazetta three days per week. He started taking his Social Security benefit when he turned 62, three years after his departure from the fire department.
"I guess everybody has a different reason because everyone is different," said Gilger, 80.
His reason was purely dollars and cents.
"It was just monetary. We (he and his wife) had just moved to Florida, and I just decided at 62, what if I die at 65? I'm not going to get much," Gilger said.
It's not just a financial equation though. Deciding when to draw benefits depends on a myriad of personal factors such as age, health, other savings, marital status and plans for retirement.
The complex topic -- when does one retire? -- rises frequently with clients of PNC Financial Services' wealth management office in Youngstown.
"The answer, it's actually a personal answer, and it depends on several factors … We look at their current cash flow needs -- what are you spending now, what do you anticipate spending and need in retirement? Another factor that we talk about, what is you current health situation? Do you have health issues? What is your family longevity?" said Karen Segesto, senior relationship strategist at the Youngstown office.
The report's authors say people aren't spending enough time sorting through this process and policymakers could do more to encourage it.
"If you have the discussions, you can you optimize your decisions," said Jason Fichtner, former chief economist at the Social Security Administration and one of the report's authors. "These discussions aren't necessarily happening for everyone."
Those conversations are important because Americans are increasingly in charge of their own retirement planning and Social Security is a major component. It accounts for about one-third of all income annually received by U.S. retirees. And many Americans are underprepared to supplement their retirement with their own savings. For about one-third of retirees, Social Security is their primary source of income.
"It is not just about increasing your income -- it's about increasing your chances you'll be able to afford retirement," Fichtner said.
Said Segesto, "What you do, you work with an adviser, you look at other sources of retirement. Do you have what we call non-qualified money -- money that is already being taxed -- because people can, in theory, retire and be in the lowest tax bracket of their life. Because if you're living off just your savings money … or you have a dividend-focused investment portfolio, you could literally retire and be in a 15 percent tax bracket."
The researchers also estimate that elderly poverty could be cut by 50 percent if all retirees claimed Social Security at the optimal time. They suggest policymakers make changes to encourage people to claim it at a more financially advantageous age, such as improved education for those eligible for Social Security or changing the terminology to indicate that benefits may increase with time. For example, researchers suggest that instead of calling 62 the "early eligibility age" it could be labeled the "minimum benefit age."
While there is no one optimal age, the researchers found that 92 percent of retirees would be better off waiting to claim Social Security until at least their 65th birthday. The exact timing is tough to pinpoint, even varying within households depending on age and who earned more.
That being said, some people are better off taking the benefits as soon as they can, such as those in poor health who have less time to enjoy their benefits.
For others, waiting for the ideal time to claim would mean losing wealth in their 60s, as it would require them to live off savings or investment account withdrawals instead of Social Security benefits.
"This shouldn't be about 'claim early' or 'claim late;' it should be a discussion," Fichtner said. "If anything, just claim as late as you financially can."
Americans who begin taking the benefits at 62 take reduced benefits. People also can wait until the full retirement age, which is based on the person's year of birth, said Segesto. For people born between 1943 and 1954, the full retirement age is 66 and from 1960 or later, it's 67.
For example, if a 62-year-old whose full retirement age is 66 takes the benefit at 62, the benefit will be reduced by 25 percent, Segesto said.
"If you defer … it will continue to accumulate and grow until age 70, so it accumulates 8 percent a year," Segesto said.